GRUMA's (GMKYY) CEO Kevin Mills on Q1 2016 Results - Earnings Call Transcript

| About: GRUMA SAB (GMKYY)

GRUMA SAB DE CV ADR (OTC:GMKYY) Q1 2016 Earnings Conference Call April 21, 2016 11:30 AM ET

Executives

Raul Cavazos - CFO

Analysts

Fernando Ferreria - Bank of America Merrill Lynch

Lauren Torres - UBS

Alex Robarts - Citi

Luis Miranda - Santander

Pedro Leduc - JP Morgan

Jose Yordan - Deutsche Bank

Operator

Good morning, ladies and gentlemen. Thank you for standing-by. Welcome to the Gruma’s First Quarter 2016 Earnings Conference Call. During today’s call, all parties will be in listen-only mode. Following the speakers’ remarks, the conference will be opened for questions. [Operator Instructions].

I would like now to turn the conference over to our host, Mr. Raul Cavazos, Gruma’s Chief Financial Officer. Please go ahead, sir.

Raul Cavazos

Thank you. Good morning, everyone, and thank you for joining us today for our first quarter 2016 earnings conference call. This quarter delivered a good start for the year, with further strengthening of profitability, especially in the U.S. division.

The implementation of strategies to reinforce our position as the branded consumer goods company has been yielding results, enable us to continue improving margin and profitability. Our strategy to change the sales mix to higher margin products which is still in place. Now going stronger with the rationalization of our food service SKU and is expected to continue providing better results for both that retail and improve service segments.

Beginning this quarter, we are providing a breakdown of results in our US and European operators. So you can have a better idea of where we are and the opportunity we have to continue expanding margins not only in the US, but also in Europe.

In regards to our results, we are pleased to report a 17% increase in sales, 24% in EBITDA and 29% in the majority [ph] net income. Most of these improvements came from the US division, where we still anticipate further opportunities for overall revenues and enhanced profitability.

Our net comprehensive financing cost was 137 million pesos, 55 million pesos more as the company have FX gain on yield that were not recorded introduced for this quarter. Income taxes increased 25% driven by higher pretax income. The effective tax rate was 30%. Majority net income was 1.3 billion pesos, almost 30% more driven largely by better operational performance, especially in the US operations and the weakness of the peso.

In terms of our financial structure the company reported $729 million of debt at quarter end a 5% reduction to achieve a gross debt-to-EBITDA ratio of 1.3 times. The continued improvements in the company's operational performance coupled with a healthy financial position helped us to obtain an additional upgrade to our debt rating from BBB minus to BBB plus by the S&P last March with the stable outlook.

Now let's talk about our main subsidiaries. At Gruma USA, our sales volume was flat. Corn flour and [indiscernible] tortilla volume increased, while tortilla food service declined in connection with the decision to further review SKUs by focusing on high margin products.

Also food service was affected by weaker performance of some customers. Net sales grew 1%, which is at higher rate than volumes and were driven by the change in the sales mix to retail segment and slower with flour tortilla at the small accounts in general. Part of this was observed by lower corn flour prices in connection with lower corn costs. EBITDA increased 23% and EBITDA margin climbed 17% from 15.8%, driven by better sales mix, lower raw material cost and lower freight and non-deductible expenses.

Additionally, sales volume increased 3%, corn flour rose 7% due mainly to strengthening our consumer [ph] initiatives in Spain to improve customer service, higher sales to our US operations and composition of same macro users. The increase in corn flour was partially offset by the reclassification of by products for animal feed and operation that affected April 2015 is no longer part of these. Net sales grew 7% in connection with sales volume growth and price increases implemented during December 2015 to reflect higher corn cost. EBITDA increased 1% and EBITDA margin declined to 17.4% from 18.6%.

At Gruma Europe, sales volume decreased 9% due to the partial and temporary suspension of operations at the mid-section of our Italy mill to change the production at mill for the newest technology, which will allow us to improve efficiency and production capacity. This mill is resuming operational slowing.

Net sales declined 2% due to the aforementioned sales volume reduction. Net sales fell at a lower rate than sales volume because of the change in the sales mix to our tortilla cost. EBITDA decreased 14% and EBITDA margin declined to 6.5% from 7.4% due to lower fixed cost absorption and higher labor and corn costs.

At Gruma Centroamerica, sales volume decreased 5% due to more relative competition in corn flour in Honduras. Net sales rose 15% due to the peso depreciation effect and to a lesser extent, higher prices of corn flour and tortillas. EBITDA increased 22% and EBITDA margin improved to 10.2% from 8.9%, reflecting lower raw material and energy cost coupled with price increases.

On the other Subsidiaries and Eliminations line, EBITDA improved by 126 million pesos resulting basically from the peso deprecation effect on Gruma Corporation and better operational performance at the Asia and Oceania operations [indiscernible], especially the technology operations.

With this I'll close remarks this morning and I will ask Sudan to help us for the Q&A session. Sudan, could you help me please?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Lauren Torres of UBS. Please go ahead.

Lauren Torres

Yes, hi. Good morning, everyone. My question is on your U.S. business, you mentioned that there is still opportunity to improve margins in the U.S. and we did see some good expansion in the quarter. So just curious to get your perspective on, where there is better opportunities to get that margin expansion? You are doing quite well on cost, is there more on the cost side that you expect to see a benefit from or I guess as we look at the top line trends initiatives in retail versus food service for these more higher margin brands, just trying to get a better sense of where this future upside come from being that you are on the right track but you are saying still there is more upside form here.

Raul Cavazos

Yeah, Lauren. Let me tell you that of course as I was telling you we are expecting to have improved results in Gruma Corp, and it is expectations that margins could be expanded to something in between 18% and 19% in the mid-term.

How we are expecting to do that, well we are quite confident that the strength, the company has developed over the time. So the strong brand recognition, our leadership position in the market, of course the economy of the scale and the distribution capabilities we have in Gruma Corp., as well as the innovation products, since we are launching products frequently to the market in response that the consumer is expecting from the company. All of this among others are basically the way to support the strategy we are following at Gruma Corp. Then we are quite comfortable that we will be in the same trend.

Of course, as everybody can think, while we are improving the margins at this level, all this is going to be a little bit complicated to improve it. But in our plan, we are contemplating that, we have considered that, and again we are quite confident that we have room for growth and these [indiscernible] in between 18% to 19%, Some other things that of course you must take into consideration in this process is going to be, of course the changed sales mix, we are doing on a daily basis, let's say we are promoting the most profitable products. We are promoting this [indiscernible] that allow us just to improve profitability in both our basically that low count packages for both corn and with tortilla.

And also, the SKU reduction this is quite important, because once we have room for the revision of SKU at this point of time mainly we have about, something about 550 to 600 SKUs in Gruma Corp. And the target is just to be something about 400. May be during these 2016 and 2017 we will still introduce, and we will still do it this practice just to improve our efficiency in all our forecast.

I am not saying that we already but also you must take into consideration the following, we have some freight expenses, some additional freight expenses because we have basically improved [ph] installed in our plant and since we have now build a new plant that will allow us just to avoid freights in other words to import products from other plant for some particular reason, that will allow also to be more efficient on [indiscernible]. That's what I can tell you Lauren.

Lauren Torres

Great, thank you. And if I can just ask a quick follow-up, you mentioned in the quarter there were some weaker performance in food service in the quarter, what was that related to? Is that - or you are just saying weaker trend?

Raul Cavazos

Can you repeat again, because I can't hear you well?

Lauren Torres

Sure, sorry. You mentioned weaker performance from some customer in food service in the U.S. in the quarter, is that something specific to the quarter or to particular customer or you are just seeing weaker trends?

Raul Cavazos

No, as you remember there is a customer that have been facing kind of issue in the States, an important chain of food service with some kind of contamination, with e-coli in some of their restaurants. Now we are recovering, to say, they are recovering also but of course during this quarter, the sales were lower than in the past quarter. But as of today according to the information we already have from our people in Gruma Corp., are basically comparable, they are in the right path to be in the short-term in the same level that we had in the past.

Lauren Torres

Okay, very clear. Thank you.

Unidentified Company Representative

Hi, Lauren. This is Rafaelo [ph]. Just regarding this question that you asked, part of the effect that we had in food service had also to do with the reduction of SKUs that we are doing. If you remember when we started a couple of years ago, reducing the numbers of SKUs, we started in the retail sector or in the retail segment. And at that time we had some expectations that limit in some way the growth of volumes. But of course it gives us much more profitability. So the same thing that we were doing in retail is what we are doing now in food service. So this quarter we saw an effect on the volumes, but of course that give us the opportunity to improve the profitability and now we will be more focused in the reduction and in the change of mix of products within the food service segment.

Lauren Torres

Okay, thank you.

Raul Cavazos

You're welcome.

Operator

The next question comes from Fernando Ferreira of Bank of America Merrill Lynch. Please go ahead.

Fernando Ferreria

Good morning, everybody. Thanks for breaking down the results between Europe and U.S. I had a question on Europe, Raul, you mentioned, well first of all when you say that you want get to 18% margin at Gruma Corp. does that include Europe or not? And then what are the main actions that you are taking to improve profitability? In Europe, where do you think that margins could be in Europe in the next couple of years? Thank you.

Raul Cavazos

Yes, well, no when I talk about 18% to 19% said in Gruma Corp., we were basically the U.S. operations, and for the European operations there is expectations that in the mid-term margins would be improving from maybe, from the quarter levels to something between 12% and 14% in the next two, three years.

What are we doing of course, well we are also implementing particularly the [indiscernible] in terms of our clients and product, SKUs let’s say, we are also using. Just to give you an idea, we came from the last few years with the European operations, this operation was losing money and we have negative EBITDA margin, we have been moving from minus 3% to 6.5% growing [ph].

We are improving these results, of course, we are adding production capacity in some of our plants and we have room for growth for two additional lines instead of, we didn’t plan particularly in the UK, and as soon as we are improving this production capacity with a lower investment, let’s say the profitability or the turn of this plan it would be better let’s say in other words we will take advantage of our economies of scale.

Also we are launching products similarly within that space. We are also again negotiating with some particular customers, which we have - we used to have losses or negative margins in the relationship. We are negotiating to increase prices and we are going out and we are replacing those sales with some others particularly in retail that we will have just improved results.

Also through the acquisition we did in Spain, we are reducing transportation cost and we will lower cost in Netherland and the UK and also that has given us important benefit in terms of [indiscernible]. When we talk about margins for Gruma Corp., I'm talking about U.S. operations again 18% to 19% in the next two, three years and for our European operations for both corn and corn flour and tortilla in Greece, in a combined operation in Europe, we are expecting something between 12% to 14% in the next two, three years.

Fernando Ferreria

That’s great. Thanks.

Operator

Our next question comes from Alex Robarts of Citi. Please go ahead.

Alex Robarts

Hi and good morning everybody. Wanted to go back to the top line trend in the U.S. and definitely appreciate that in the tortilla business right, this 2% decline in the quarter in volume is associated with SKU and a weak customer, but could you talk to us a little bit about what you saw in the first quarter in the U.S., in the industry. How was the dynamic in terms of demand in tortillas in the U.S. from the volume point of view and what do you think could be a fair industry growth number this year? I mean is it - are we looking at a potential decline for the industry. So my first question really just relates to how you guys did excluding some of these one-off items and such and where you think the industry can go this year.

Raul Cavazos

Apparently the industry is growing in dollar term in the U.S. is something about 4% to 5% according to Nielsen, and about 80% of this growth has been catching by Gruma Corp. Then what we can expect for this year is basically the same trend. The results shown and as you say in volume from Gruma Corp., it was because we have implemented the [indiscernible] business for you on the food service as we did in the past in the retail. But we didn't manage volume, new volume in terms of again, in volumes as well as growing in terms of dollar term. Both of them, and we are catching about 80% 85% of this volume in the category in the U.S.

Actually the reduction as we experienced in this, in volumes in this quarter [ph] percent in tortilla, it got mitigated because we grew on the retail segment, we will be a little bit higher than we were on the food service. However we are we feel quite confident that in some point in time and maybe even during the year we will recover those accounts with profitability. And that will allow us to stable volume not only in volumes and sales but also in profitability for the company. That used to be growing and is sustainable. It is growing around the [indiscernible] everywhere. The tortilla industry volume also in Europe in Asia and everywhere.

Alex Robarts

Okay. But so just to understand the 4% to 5% category growth in the U.S. for tortillas is first quarter as well as what you think it can be for the full year. Is that what you're saying?

Raul Cavazos

Yes, absolutely. Even at your starting value [ph] for the year.

Alex Robarts

And it's volumes or sales sorry, just to clarify?

Raul Cavazos

On sales, in volume maybe a little bit lower but in term of in dollar terms it's going to be 4% to 5%.

Alex Robarts

Okay. And you mentioned something about the SKU reduction target. And it was - it didn't come out at least to me very clear. Could you just repeat that and I'm sorry so it's 550 to 600 SKUs now?

Raul Cavazos

Yes, we have already about 550 to 600 there and the idea is just to be something between 400 and 450.

Alex Robarts

Got it. Okay, yeah. That it didn't come out on the tape very well. Okay, well the second question again on the top line but at GIMSA. I appreciate the information around the price increase that was implemented in GIMSA in December to reflect the higher corn cost. Did you see in the end that the price increase that you took in the first quarter is going to be enough to offset the corn cost? I mean obviously that there is an FX component here, most of that happens in the first half. So the question is did it offset, will we perhaps need to see another price increase, and if you could comment around what really was your corn cost increase roughly in the first quarter in Mexico side in pesos?

Raul Cavazos

Yeah well. Certainly the price increase we implemented at December is not to support the cost increase in the corn domestically for the four year. Actually at least what we are doing now we are in the progress just to review and align the whole cost of all that, because we are not speaking on the increased cost on corn, because of the rate [ph] as well as basis, transportation basis the Greece did here, compared with the last. I also mentioned that is not enough in the formula change and this will be higher because of gas natural gas from Mexico.

Then we are agreeing that and what we will do is just to implement an additional price increase, that is going to be announced maybe beginning May. But it's going to be maybe the second or third of May, this price increase and it is the expectation that this price will be fully implemented from beginning June 1st.

Alex Robarts

Okay, okay, very clear. Thanks. And so this really is the last one, it's more on the accounting bit. Other subs and eliminations, this line item basically is 5% of your EBITDA in the quarter up from been a negative number a year ago. And I appreciate that you've talked about putting in the byproducts for animal feed. But we also have the Asia and Oceania business, and I guess and the third is the conveyance accounting effect. Among those three elements right, so the accounting effect, the animal feed byproduct business and then Asian and Oceania business, what was driving this $120 million pay source of EBITDA, I mean, what’s the biggest piece of that and if it is the operating piece, the Asian Oceania, how can we think about this line of items for the rest of the year, that would be very helpful. Thanks so much.

Raul Cavazos

Well. For the quarter [ph] or the year I guess, I can tell you about the piece you saw in this quarter, what I could tell you maybe it’s about something about 60%, 65% of this amount is coming from Asian grain, the corn flour billing in the peso. And the rest basically came from the Asia and Oceania operations, since our animal feed division is basically flat. And then for the rest of the year, it will depend about what would be the exchange rate. Of course, in terms of the results of Asian Oceania operations, we’re doing quite well. We’re in very good terms; we had good and strong EBITDA ratios. But it would depend what will be the exchange rate, [Indiscernible] for the rest of the year. But again for the year maybe what you can consider is that our products division it would be basically flat or maybe 1% to 2% of EBITDA, it's really is not too much, but the most important will be, of course, if we still are in the same level of production rate it would be basically the central purchases to 65%, and 35% to 40% Asian Oceania prices.

Alex Robarts

Very, helpful. Thank you.

Raul Cavazos

Welcome.

Operator

[Operator Instructions] The next question comes from Mauricio Martinez [ph] of GBM. Please go ahead.

Unidentified Analyst

Hi, good morning, this is Mauricio. Thank you for taking my question Raul and Rafaelo. My question is after a certain volumes in corn flour in Mexico during last quarters, do you think you’re gaining market share in Mexico and if there is any update for Chef-mate in Mexico to gain this market share? Also my second question would be if you have any guidance any update in the guidance for CapEx for this year? Thank you.

Raul Cavazos

Yes. Mauricio, in terms of the volumes of GIMSA for this quarter that you saw, you are right, we are gaining market share. But mostly for [Indiscernible] process for the regional process. Here most of the growth, we are growing everywhere but the most important obviously is basically in the central region, in the West Bay region of the country, which those areas were basically little bit adaptive to the use of corn flour. Now there are mixing up just to improve the quality of the tortilla and we’re winning a lot, actually at this point of time, we are importing corn flour from our Guadalajara plant to Mexico just to satisfy the growing demand for corn flour in the area, and that's why we will start operations with the full production unit in Chaco plant next July. And by the end of year let's say maybe the beginning of fourth quarter the idea is just to start up the product in the second production line and the third production line will be ready by May 2017.

Sales are growing very well. Again we are gaining market share basically for [Indiscernible], even if we are also gaining market share with some others and even we’re experiencing the newer competitors our brand, because of quality, because of yield, because of price, because of color, because of flavor, because everything is much, much better than the competitors. So we are growing a lot.

And let me tell you that for this second quarter, we are seeing an important growth compared with that, last five years. We are growing a lot. In the second question, what about CapEx, no I don't want to change any kind of guidance for the capital we are little bit delayed but I feel at this point in time, it's going to be a little bit in disposable for my side to reduce this amount of CapEx. What I can tell you is basically in the CapEx we announce we have important amount of carry overs from 2015 and in this little bit maybe we will have some value for mix. But at this point of time we will maintain and keep the same $300 million, $350 million on targets for the year.

Unidentified Analyst

Perfect, very helpful. Thank you very much.

Raul Cavazos

Sure Mauricio.

Operator

The next question comes from Luis Miranda of Santander. Please go ahead.

Luis Miranda

Hi, good morning Raul. And guys, thanks for the additional disclosure on Europe, and just a follow-up question on Mexico. Raul with your explanation and what you mentioned on the tortilla makers adding corn flour to the mix and your commercial initiative that you have been implementing in last say slightly more than a year in Mexico, would it be fair to assume that they are gaining traction and these I would say very important volume growth that we saw in the first quarter could be sustainable in the medium-term. And I mean maybe 5%-7% might look too aggressive but may be 4%-5% could be sustainable throughout the year. And just intended with that question is that initiative implying more aggressive commercial initiatives and how that could impact EBITDA margin in Mexico. Is the 17% sustainable or what are you looking in the medium-term? Thank you.

Raul Cavazos

Sure, Luis. Well, let me tell you that the volume growth you will see in the fiscal, within that is going to be sustainable and this is - this year compared with last. We feel quite comfortable with that and this is because we, as you said we implement, we [indiscernible] on the commercial initiatives we implement just to do that. But we have several things to do.

We basically opened up warehouses in the country, just to be closer to the consumer and the tortilla maker, the tortilla producer just to improve our service with them, not only in terms of the quality but also the service is quite important for them. And another initiative we implemented basically was what we called [indiscernible]. What that means? We have a person in a truck with corn flour bags, in the backs of the truck and he is going on a door-to-door basis selling corn flour. These new routes we implemented in Mexico. Of course we are not expecting that will yield us in terms of profitability immediately. Of course we are opening new routes. In our experience we have around may be 15 months just to be profitable.

At this point of time we have been implementing an important amount of growth and let me tell you that 98% of order growth implemented has been successful for us and has been getting us, and not only is giving us important at home, but is also assuring the volumes because nobody else is doing that.

When I talked to you about assuring the volumes I am talking that they are quite comparable to receive the corn flour in the home, instead going to look for corn, or going to look for corn flour, to the market. And the price we sold this corn flour is of course higher because that represents a high costs for us. Then we also feel that the volume will be also sustainable and eventually because of higher volume we will improve our or regain the volume we have lost in the past.

Luis Miranda

Thank you, Raul.

Raul Cavazos

Sure.

Operator

The next question comes from Pedro Leduc of JPMorgan. Please go ahead.

Pedro Leduc

Good morning everyone. Thanks for taking my question and congrats on the results. Also appreciate the incremental disclosure. Quick ones, first could you please remind us how far out you have hedged for U.S. contracts and how these level speak? And also on a consolidated level last call I believe there was a message for perhaps full year consolidated margin expansion for about 40 basis points. Now this quarter start about pretty strong volumes and others. So this 40 basis points could pass perhaps upside risk from what you have seen so far. Thank you.

Raul Cavazos

Sure. Pedro, thank you. Talking about the hedged corn prices for the U.S. operations clearly we have about 50% of the corn that we will mill in 2017, we have hedged at about 4% lower cost of corn than we already have. That means, that would means savings in terms of cost of corn that we will imply kind of [indiscernible] to keep competitive with that corn and with some others in the space. Of course we still have room for hedging the remaining corn in space. But I think we have a very good balance in terms of cost as well as in terms of - plus in terms of hedge. And let me tell you Leduc, this is not only for corn but also for wheat in the States, for products on the tortilla side we already hedge 50% of our wheat that we will require to produce our tortilla and that represent the cost we already hedge represent about something about 10% lower cost of wheat, wheat flour than the wheat flour we are using this year in our production process.

In terms of the second question you asked…

Pedro Leduc

Just 2016 on the full year margin expansion last call you talked about....

Raul Cavazos

Yeah, I remember that. I talked about that. Yes, we announced last conference call that we would make an improvement in margins on a consolidated basis by about 40 basis points. Maybe you can take into consideration, we are talking about 40 to 50 basis points. I just want to be conservative and what we have to do is, what it is basically [indiscernible] or even better. But at point of time you can take into consideration 40 to 50.

Pedro Leduc

Okay. Thank you very much. Appreciate all the color. Thank you.

Raul Cavazos

Thank you, Pedro.

Operator

Next question comes from Jerome De Guzman [ph] of Morgan Stanley. Please go ahead.

Unidentified Analyst

Hi, good morning. I had a question on GIMSA on your margins for GIMSA going forward. Just given the FX have been stronger recently and then also the pricing that you mentioned that you are planning to take, do you still expect the margins to stay in the 17%, 17.5% range or do you think there is also some upside to that expectation?

Raul Cavazos

No, and basically this expectation that we will be in the same range, since we are basically increasing prices just to reflect the increase in corn cost. But even we have some regional results it would be marginally because we have, we would have greater or larger sales. Then you can take into consideration the same, basically the same guidance in terms of margins.

Unidentified Analyst

Okay, thanks. And then just question on the compensation because that was a little surprise that the pressure came more from SG&A and it actually has gross margin gain. Is that kind of how you expect to see it through the year, or should we see it kind of the opposite way? You see more of the pressure from corn prices hitting on the gross margin?

Raul Cavazos

No, I think in terms of prices, hold on a second please. For this quarter you're right, we increased our gross margin in most of the - new gross margin but just to increase the opportunity [ph] which will allow us to improve by around 7% our producing mix. Maybe for that rest of the year we're going to be basically, competitive since we are really implemented this initiatives, let's say we will rent the new warehouses that both of us, we were planning to open this year. And maybe we will be efficient in that.

Unidentified Analyst

Okay. Thank you.

Operator

The next question comes from Hector Maya [ph] of Vector. Please go ahead.

Unidentified Analyst

Thank you very much for taking the question. I would like to know as given the recent surge in prices for wheat and corn…

Raul Cavazos

Excuse me, could you speak a bit little louder please?

Unidentified Analyst

Sorry. Could you hear me now?

Raul Cavazos

Yes, much better.

Unidentified Analyst

Well, thank you very much. So I would like to know if given the recent surge in prices for wheat and corn that weather complications in South Africa, Brazil, Argentina and concerns for the likelihood of droughts caused by effects of La Niña later this year, are you expecting certain pressures in costs and margins, is there any inventory strategy already in place in case this effect materialize at higher price in the following months or how long you are pursuing this situation? Because there will be also a - have you in effect [ph] in operation for Central America related to this?

Raul Cavazos

Yeah. Let me tell you that weather always is kind of in a war with the company, particularly with regard to South Africa, yes they have some kind of a late rain. And production will be lower. However, don't want be a huge amount of losses in terms of corn and wheat.

Sometimes of course in market, actually you have seen the market growing up in the last maybe 10 days or something around that. But what is going on, let's say with that better tools and weather in Brazil, they were telling that Brazil, there's a La Nina and the corn, it was to be affected. And finally it is that the lack of corn it was basically 2 million tons out of total of 30 million during this sowing year. But we are talking about 30 million in a world production of 950 million tons of corn. Then the rest is a little bit, is not too much too be worried, about La Nina at this point in time. The expectation is all 50-50. So in the case Nina will be formerly announced by September/October that [indiscernible] but at the same time that U.S. corn harvest will be basically in place.

And then for this year we are not expecting an important produce of corn. We will continue with our hedging for the full year for this 2017. And maybe if the prices of the corn and wheat are good during this year and the possibilities of the possibilities of the formation of the Nina by the September/October, then maybe we will start to hedge our total prices this year just for the next, for the wheat and corn that we use in 2018, in order to avoid any kind of risk.

Unidentified Analyst

Thank you very much. That was…

Raul Cavazos

I don't know if you feel it's a little more complicated than that. But that’s basically speaking out in other words what I want to tell you is that we are of course, if not concerned, we’re at aware about that, we are on board of that, we are in charge of that and we are making the decisions just to avoid any kind important risk of the company.

Unidentified Analyst

Thank you very much. I understand that’s really helpful. Thank you.

Operator

The next question comes from Jose Yordan of Deutsche Bank. Please go ahead.

Jose Yordan

Hi, good morning guys. I just wanted to follow up a little bit on the CapEx. I see that in the first quarter it is trailing the amount you spent last year, and it’s especially trailing the amount that you mentioned in the last conference call, that would be spent this year. So I mean I realize that the number you gave was although your sort of approved expenditures and maximum, so to speak but if you can give us any color as to what you will realistically be spending in CapEx this year and if there's any carryover to next year it would be helpful to know next year as well. Thanks.

Raul Cavazos

Well, Jose I didn’t want to change our guidance in terms of CapEx because of course we must start operations as we planned this year, maybe another --production like we already have but maybe at least two, and some the third line will be basically start operations maybe during the first quarter 2017 but most of the investment required to be on time will be basically this year.

We are also expecting to start up the operations in the Malaysia plant in next July. We are expecting to start, to receive corn in our silos, in [indiscernible] we are increasing the storage, the corn storage capacity there by September/October this year. We are expecting to start operations in the Russia plant by the fourth quarter of the year and we are also start operations in our Dallas plant in maybe September of this year as well as the corn flour production unit of our plant we will build this year, by maybe at the end of the year, and we want in the two production unit.

That’s why I don’t want to change but we are, at this moment maybe we can talk about in terms of 350 we announced last quarter, maybe it could be no more than $50 million CapEx for mix.

Jose Yordan

Sorry I didn't get the last part. It wouldn’t be how much for the year, if….

Raul Cavazos

No more than $50 million would be carried from 2016 to 2017 [ph], not more than 50. But again I do want it to be conservative and we will talk about that on the subsequent conference calls but at this point in time I don’t want to be more or less on that and I prefer to say if that's the case it could be more than $50 million maybe.

Jose Yordan

Okay, so most of the year’s expenses will be in the second half and we should just expect…?

Raul Cavazos

Right.

Jose Yordan

Okay. Thank you.

Operator

[Operator Instructions] There are no further questions at this time. I’ll now hand the call back over to Raul Cavazos for any closing remarks.

Raul Cavazos

Well, thanks very much. Thanks again everybody for [indiscernible] in today’s call and please if you have some additional question or some kind of doubts, please feel free to contact us, [indiscernible] or myself in order to try to address any kind of question you may have. Thank you very much. Have a nice day. Bye-bye.

Operator

Ladies and gentlemen, this concludes the Gruma’s first quarter 2016 earnings conference call. Thank you for your participation. You may now disconnect.

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